Financial: Generally Accepted Accounting Principles and Balance Sheet Essay

Submitted By fatehama
Words: 1556
Pages: 7
Open Document
1. “Financial statements”: what does that mean ?
Financial statements are a way to report financial information about a business or organization. The information in financial statements can be used by people within a company, such as managers and employees, and by people outside the organization including vendors, invertors, and bankers.

Also a report which quantitatively describes the financial health of a company. And manage proactively, you should plan to generate financial statements on a monthly basis.

2. What reports are included in the financial statements?
This includes an income statement and a balance sheet, and often also includes a cash flow statement. Financial statements are usually compiled on a quarterly and annual basis.

Income Statement
Simply put, the income statement measures all your revenue sources vs. business expenses for a given time period. To help explain things easily, let's consider an apparel manufacturer as an example in outlining the major components of the income statement:
Sales. This is the gross revenue generated from the sale of clothing less returns (cancellations) and allowances (reduction in price for discounts taken by customers).
Cost of goods sold. This is the direct cost associated with manufacturing the clothing. These costs include materials used, direct labor, plant manager salaries, freight and other costs associated with operating a plant (for example, utilities, equipment repairs, etc.).
Gross profit. The gross profit represents the amount of direct profit associated with the actual manufacturing of the clothing. It's calculated as sales less the cost of goods sold.
Operating expenses. These are the selling, general and administrative expenses that are necessary to run the business. Examples include office salaries, insurance, advertising, sales commissions and rent.
Depreciation. Depreciation expense is usually included in operating expenses and/or cost of goods sold, but it is worthy of special mention due to its unusual nature. Depreciation results when a company purchases a fixed asset and expenses it over the entire period of its planned use, not just in the year purchased. The IRS requires certain depreciation schedules to be followed for tax reasons. Depreciation is a noncash expense in that the cash flows out when the asset is purchased, but the cost is taken over a period of years depending on the type of asset.
Whether depreciation is included in cost of goods sold or in operating expenses depends on the type of asset being depreciated. Depreciation is listed with cost of goods sold if the expense associated with the fixed asset is used in the direct production of inventory. Examples include the purchase of production equipment and machinery and a building that houses a production plant.
Depreciation is listed with operating expenses if the cost is associated with fixed assets used for selling, general and administrative purposes. Examples include vehicles for salespeople or an office computer and phone system.
Operating profit. This is the amount of profit earned during the normal course of operations. It is computed by subtracting the operating expenses from the gross profit.
Other income and expenses. Other income and expenses are those items that don't occur during the normal course of business operation. For instance, a clothing maker doesn't normally earn income from rental property or interest on investments, so these income sources are accounted for separately. Interest expense on debt is also included in this category. A net figure is computed by subtracting other expenses from other income.
Net profit before taxes. This figure represents the amount of income earned by the business before paying taxes. The number is computed by adding other income (or subtracting if other expenses exceed other income) to the operating profit.
Income taxes. This is the total amount of state and federal income taxes paid.
Net profit after taxes.
Show More

Related Documents: Financial: Generally Accepted Accounting Principles and Balance Sheet Essay

Discussion Financial Reporting Environment And GAAP

Discussion Financial Reporting Environment and GAAP Generally Accepted Accounting Principles (GAAP) The role of generally accepted accounting principles (GAAP) in the preparation of financial statements is a set of guidelines that inform businesses how to properly record accounting information in a fair and consistent manner. “Is a rule” to meet that requirement, statements are prepared in accordance with GAAP, which encompasses the conventions, standards and procedures, necessary to define accepted accounting…

Words 440 - Pages 2

Financial Statements Essay

Financial Statements ACC/280 August 8, 2011 Financial Statements The main purpose of accounting is to identify, record, and communicate certain economic events so an organization can determine their financial status and make sound financial decisions. The events are summarized in four basic, but important, financial statements, balance sheet, income statement, retained earnings statement, and statement of cash flow. In this paper, the subject to discuss is the purpose of accounting, how…

Words 793 - Pages 4

Essay about Generally Accepted Accounting Principles and Balance Sheet

Chapter One Accounting and the Business Environment What is Financial Accounting?  Financial Accounting: The process of identifying, measuring and communicating economic (financial) information about a company, primarily to investors and creditors (existing or potential). Content of Financial Reports   The Management Letter The Financial Statements:       Balance Sheet Income Statement Statement of Shareholders’ Equity Statement of Cash Flows The Footnotes The Auditor’s Report 3…

Words 1096 - Pages 5

General Accounting Principles Essay

Generally Accepted Accounting Principle Paper Maria Cecilia Blancia University of Phoenix HCS/571- Financial Resource Management Joseph Rudd January 19, 2015 Introduction Many health care organizations today are facing challenges on how to manage and operate financial information. Some of the generally accepted accounting principles used in the past may not as effective to tackle the current issues in dealing with the dramatic changes in health care competition, government regulation…

Words 873 - Pages 4

Convergence: International Financial Reporting Standards and Financial Statements Essay

GAAP means Generally Accepted Accounting Principles which are a collection of guideline and practices used by the accounting community. In the U.S., these standards are set by the Financial Accounting Standards Board (FASB) and continually update when new accounting issues and concerns arise with GAAP (investor glossary). Outside the U.S. there is the International Financial Reporting Standards (IFRS) which are a set of accounting standards developed by the International Accounting Standards Board…

Words 1724 - Pages 7

TireeCherise ACC290 IFRS v GAAP Essay

Ealey ACC 290 April 6th 2015 Gary Foote Accounting is an important feature in every business worldwide. Essentially, it is necessary in order to keep track of the economic events that occur within a business. These records are used within a company, however they are also used for other purposes, one of them being to report their financial activities. For this to be effective, there must be standards that businesses to adhere to in order to make financial reporting uniform across the board. That…

Words 1548 - Pages 7

Essay on Chapter 2 Study Guide

CHAPTER STUDY OBJECTIVES 1. Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; or intangibles. They classify liabilities as either current or long-term. A stockholders’ equity section shows common stock and retained earnings. 2. Identify and compute ratios for analyzing a company’s profitability. Profitability ratios, such as earnings per share (EPS), measure aspects…

Words 3348 - Pages 14

Financial Statement Analysis Study Guide Essays

Financial Statement Analysis Financial Reporting & Analysis Questions Professor Mahoney Spring 2013 Chapter 1: Introduction to Financial Reporting I. Questions 2. How does the concept of consistency aid in the analysis of financial statements? What type of accounting disclosure is required if this concept is not applied? Consistency allows for the same accounting principle from period to period. A change in principle requires statement disclosure. 3. The president of your firm…

Words 3553 - Pages 15

Essay financial Accounting

Assignment 2: You Are an Entrepreneur! Due Week 6 and worth 280 points Student life does not generally afford a great deal of free time to pursue your personal interests; however, at one point, you may have considered turning a personal interest or hobby into an official enterprise. Today, you have finally decided to turn that hobby into a business but have realized that you need start- up capital from a lender or investor. To obtain funding, you need to convince a lender / investor that your…

Words 1244 - Pages 5

Hcs 405 Research Paper

Paper HCS/405 Health Care Financial Accounting Diana Schilling 8/15/2013 According to the American Medical Association’s Code of Medical Ethics, “a physician shall support access to medical care for all people. This principle becomes an ethical dilemma, however; in our currently divided system in which those without insurance are not provided the same access to health care as those with insurance. Health care providers are continually obligate to balance the increasing need for cost containment…

Words 1149 - Pages 5